Teaching Financial Literacy to Kids: Money Lessons and Accounts That Can Grow with Them

Global Money Week takes place March 16 through 22 and focuses on helping kids and teens build financial literacy skills. From earning an allowance to saving in tax-advantaged accounts like 529 plans or custodial Roth IRAs, early lessons can shape lifelong money habits.

Here is a closer look at practical ways to teach children how to manage money and how certain accounts may help support their future goals.

Practical Ways to Teach Financial Literacy to Kids

Have Kids Earn Allowance Based on Chores

Earning an allowance gives children a way to connect money with effort. When kids see that income follows work, they begin to understand the value of what they spend. This creates an opportunity to practice budgeting. It also opens the door to conversations about saving versus spending and how to decide whether a purchase is worth it.

Let Them Help Plan Family Vacations

Few things are more exciting for a kid than a vacation. Giving them a role in planning helps them see the full cost of experiences and the trade-offs involved. Staying in a nicer hotel may mean fewer excursions. Visiting an amusement park also requires budgeting for food and transportation. These real-world examples make financial concepts tangible and memorable.

Set Goals for Big Purchases

If a child wants an expensive toy, or a teen wants a new phone, this is a great opportunity to explore delayed gratification with them. Work with them to set a monthly savings goal, understand the impact that has on their current spending, and adjust their budget so they can meet their goal. Saving toward a larger purchase builds confidence and prepares them for future milestones such as a car or a home down payment.

Match Contributions in Tax-Advantaged Accounts

While minors generally cannot open tax-advantaged accounts on their own, adults can establish certain accounts on their behalf. A child may contribute earned income, and an adult can deposit those funds into the account and even choose to match contributions. Seeing how contributions may grow over time can help illustrate the concept of compounding and long-term saving.

Tax-advantaged Accounts for Children

CESA

Families can save for a child’s education through a Coverdell Education Savings Account (CESA). Contributions are made with after-tax dollars, and earnings grow tax-free when used for qualified education expenses such as tuition, books, and other supplies. Funds can be used for elementary, secondary, and higher education expenses.

Contributions must be made before the child turns 18 and are limited to $2,000 per year, per child. Funds must be used by age 30 or transferred to another eligible beneficiary. Otherwise, earnings may be subject to taxes and penalties.

529 Plan

A 529 plan is also designed to help families save for qualified education expenses and allows for after-tax contributions. However, unlike a CESA, there are no federal income limits to open a 529 plan, and contribution limits are based on lifetime maximums set by each state. These limits are often based on the expected cost of education and generally range in the hundreds of thousands of dollars.

Earnings grow tax-deferred, and qualified withdrawals are tax-free when used for eligible expenses. Unlike some other education savings options, 529 plans do not require funds to be used or transferred by a specific age. This can provide additional flexibility for long-term education planning.

Custodial Roth IRA

If your child or grandchild has earned income outside of allowances or gifts, for example a teenager with a babysitting job, they may be eligible to open a Roth IRA. You can contribute on their behalf up to the annual maximum of $7,500, but the total contribution cannot exceed the amount they earned.

Contributions can be withdrawn tax-free at any time; however, earnings withdrawn before age 59½ may be subject to taxes and penalties unless used for a qualified expense, such as education costs or a first-time home purchase. The account transfers to the child once they reach the age of majority.

“Trump Account”

This account, also known as the 530A account, was introduced in the One Big, Beautiful Bill Act (OBBBA) and is a custodial account for parents and grandparents and even their employers to contribute to on behalf of their children and grandchildren until they turn 18. At that point, the account converts to a traditional IRA.

Contributions are capped at $5,000 per year and grow tax-deferred until withdrawals are made. Qualified withdrawals, for example education expenses, are only subject to capital gains tax, but non-qualified expenses will be taxed as regular income.

How To Start Saving for Your Children or Grandchildren

Teaching financial literacy to kids can help them build confidence, develop healthy money habits, and better understand the long-term impact of their financial decisions. Schedule a call with one of our IRA Counselors to learn more about how custodial accounts can help you support a child’s financial future.